Capital Asset Pricing Model (CAPM) is the fundamental model for asset pricing. In addition to the systematic risk, various factors (size effect, leverage effect, E/P ratio effect, liquidity effect, etc.) have been considered to explain asset pricing in the recent and advanced models (like Fama-French model and Carhart model). This paper provides a new factor of industry effect in addition to several other factors explained in the past. In this paper, the dummy variable regression method is used, which helps in explaining the service and non-service industry effect on asset pricing. The sample of this study contains daily return of 290 stocks of NSE CNX 500 index for 10 years. For correction of nonsynchronous trading error in the beta, the adjusted beta calculated with the help of Dimson model is used. The analysis is conducted separately for before the financial crisis and after the financial crisis. This study confirms the presence of industry effect in the return generating process of stocks in the Indian equity market. The study elaborates the interactive effect of beta and industry factor.

The Capital Asset Pricing Model (CAPM) is the fundamental model of asset pricing. This model explains the relationship between the risk and return of an asset. The return of an asset is a function of its risk component. The CAPM describes that an investor is not rewarded for every risk but the systematic risk. The risk of a security can be decomposed into two parts: the unsystematic risk and the systematic risk. The unsystematic risk can be diversified away, but the systematic risk is a non-diversifiable risk. Because of this reason the systematic risk is the main component of the CAPM, which is denoted by a Greek letter  (beta). CAPM explains that the expected return of an asset is a function of the asset’s beta. This is the reason that CAPM is also known as a single factor model. However, in the late 20th century, Fama and French (1992, 1993 and 1995) came with the three factor model in which they take into account the size factor and book-to-market factor in addition to systematic risk. Carhart (1997) further extended this three factor model and added one new factor: the momentum factor. However, the base of all the advanced models is the same and that is the CAPM.

Financial Risk Management Journal, Capital Asset Pricing Model, Industry, Evidence, Capital Asset Pricing Model (CAPM), CAPM, systematic risk, various factors, Indian Market.